Two clinics want to merge. The price elasticity of demand is -0.20, and each cli
ID: 1209773 • Letter: T
Question
Two clinics want to merge. The price elasticity of demand is -0.20, and each clinic has fixed costs of $50,000. One clinic has a volume of 7,200, and marginal costs of $50, and a market share of 2 percent. The other clinic has a volume of 10,800, marginal costs of $50, and a market share of 4 percent. The merged firm would have a volume of 18,000, fixed costs of $70,000, marginal costs of $50, and a market share of 6 percent.
A) what are the total costs, revenues, and profits for each clinic and the merged firm?
B) how does the merger affect markups and proftis?
Explanation / Answer
Lerner Index (LI) = - 1 / Elasticity of demand = (Price - MC) / Price
(A) For merged firm,
LI = - 1 / - 0.2 = 5
5 = (P - 50) / P
5P = P - 50
4P = - 50
P = - 12.5
NOTE: Price can never be negative. But based on your data price is coming out negative, which is not possible. Please cross check your data and re-post question. Revenue or Mark-up cannot be found until Price is correctly determined.
Total Cost of clinic 1 = MC x Volume = $50 x 7,200 = $360,000
Total cost of clinic 2 = $50 x 10,800 = $540,000
Total cost, merged clinic = $50 x 18,000 = $900,000
No other part can be solved.
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